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Russia Sounds Alarm on Economy as West Starts With Sanctions

The Micex-RTS Moscow Exchange, Russia's benchmark stock index, the day after the Crimean referendum on independence from Ukraine, on March 17, 2014. Photographer: Andrey Rudakov/Bloomberg

March 18 (Bloomberg) -- Russia’s economy is showing signs
of a crisis, the government in Moscow said as the U.S. and the
European Union announced sanctions over its plan to annex the
Crimea region from Ukraine.

“The situation in the economy bears clear signs of a
crisis,” Deputy Economy Minister Sergei Belyakov said in Moscow
yesterday. The cabinet needs to refrain from raising the fiscal
burden on companies, which would be the “wrong approach,” he
said. “Taking money from companies and asking them afterward to
modernize production is illogical and strange.”

Even before the standoff with the West, the worst since the
Cold War, Russia’s economy was facing the weakest growth since a
2009 recession as consumer demand failed to make up for sagging
investment. President Vladimir Putin signed a treaty today on
Crimea joining Russia, signaling his defiance of Western
sanctions. Russia won’t seek to further split Ukraine, he said
in the Kremlin.

The Ukrainian crisis is putting a strain on Russia’s $2
trillion economy, which expanded 1.3 percent in 2013 after 3.4
percent the previous year. Last year’s growth was
“insufficient” and the current outlook and government
forecasts “can’t satisfy us,” Putin said March 12.

Ruble Drops

Russia will probably dip into a recession in the second and
third quarters of this year as “domestic demand is set to halt
on the uncertainty shock and tighter financial conditions,”
Vladimir Kolychev and Daria Isakova, economists at Moscow-based
VTB Capital, said in a research note yesterday. They cut their
2014 estimate to zero growth from 1.3 percent.

The ruble has weakened about 9.6 percent against the dollar
this year, more than any of the 175 currencies tracked by
Bloomberg except the Argentine peso, the Kazakh tenge, the
Ukrainian hryvnia, Zambia’s kwacha and Kyrgyzstan som. It traded
at 36.3190 as of 6:10 p.m. in Moscow, strengthening from 36.4860
at 3 p.m., before Putin’s speech.

“Further provocations will achieve nothing, except to
further isolate Russia and diminish its place in the world,”
Obama said yesterday at the White House. The U.S. can
“calibrate our response” based on whether Russia chooses “to
escalate or to de-escalate the situation.”

Putin’s Message

Crimea’s referendum, when the Black Sea peninsula voted
March 16 to join Russia, was legal and in accordance with
international laws, Putin said today.

“Crimea is our historic legacy,” Putin told lawmakers,
regional governors and government officials in Moscow. “It
should be part of a strong and stable sovereignty, which today
can only be Russian.” Addressing Ukrainians, Putin said:
“Don’t believe those who scare you with Russia, who yell that
Crimea will be followed by other regions. We don’t want to split
up Ukraine, we don’t need that.”

Crimea Cost

The direct cost of annexing Crimea will be at least $3
billion for the Russian budget, according to Vladimir
Osakovskiy, chief economist for Russia and the Commonwealth of
Independent States at Bank of America Corp. in Moscow.

That amount includes $2 billion to replace funds from
Ukraine’s budget and raise wages and pensions to the Russian
level, as well as $1.5 billion to $2 billion for infrastructure
upgrades, Osakovskiy said in an e-mailed response to questions.

Russia already plans to spend at least 50 billion rubles
($1.4 billion) to build a bridge across the strait of Kerch to
connect the peninsula to its mainland, Transport Minister Maxim
Sokolov told reporters March 5.

The ruble’s slide, exacerbated by the intensifying tensions
over Ukraine and the threat of sanctions, forced the central
bank to look past sluggish growth and tighten monetary policy.
Bank Rossii lifted its benchmark interest rate to 7 percent from
5.5 percent at an emergency meeting March 3.

Policy makers held borrowing costs at their regular meeting
on March 14 and said the benchmark rate wouldn’t be cut in the
next several months.

Growth Outlook

Consumer-price growth accelerated to 6.2 percent in
February from a year earlier from 6.1 percent in January. Bank
Rossii wants to keep inflation within 5 percent this year after
missing its target range of 5 percent to 6 percent in 2013.

While Putin at a March 12 meeting with senior officials in
Sochi called the economy “stable,” a range of economists cut
forecasts for this year.

Morgan Stanley economists Jacob Nell and Alina Slyusarchuk
lowered their estimate for 2014 growth to 0.8 percent from 2.5
percent, according to a note to clients yesterday.

“We see Russia close to recession in the first half of
2014 as a result of the Ukrainian security crisis driving higher
rates and risk premia, leading to weaker consumption and
contracting investment,” they wrote.

Monetary tightening will make borrowing more expensive and
difficult for businesses and consumers, possibly leading to
recession this year, Vladimir Miklashevsky, an economist at
Danske Bank A/S in Helsinki, wrote in a note clients. Even a
forecast of 1 percent growth this year is optimistic given the
geopolitical environment, he said, cutting his estimate to that
level from 2.6 percent on March 14.

Capital Outflow

Capital outflow from Russia may reach $70 billion in the
first quarter and there is “a real risk that this could push
Russia into recession,” London-based Capital Economics said in
a report published yesterday.

The sum may have reached $35 billion in January and
February, Russian Economy Minister Alexei Ulyukayev told
reporters today in Moscow. That’s more than half of the $63
billion for all of 2013.

One way of helping accelerate growth would be to lower
costs for companies, Belyakov said yesterday. The total tax
burden in the economy slightly fell to 33.3 percent of gross
domestic product last year, Deputy Finance Minister Sergei
Shatalov said at the same conference.

“From the business point of view, the fiscal burden, I
think, is extremely high today for both the economy and
companies,” Belyakov said.